You have probably heard about financial literacy many times throughout your life, may it be from taking a managerial finance online course or when speaking with colleagues at work. But what exactly is financial literacy?
In short, it means possessing the knowledge to manage your money wisely. Managing finances is a lifelong journey with the specifics varying from individual to individual. But even if everyone is different, there are numerous basic skills to boost your financial literacy.
Let’s take a look at what financial literacy is, its importance, and a few tips to get started.
What is Financial Literacy?
Financial literacy is being able to understand and use various financial skills, such as budgeting, investing, and personal financial management. Moreover, it means comprehending financial principles and concepts like compound interest, managing debt, financial planning, and the time value of money, among others.
When one achieves financial literacy, one avoids making poor financial decisions. Instead, they can become self-sufficient, achieving financial stability.
The steps to attaining financial literacy are learning how to budget, tracking how much they spend, paying off debts, and planning for retirement. When you educate yourself on these topics, it would involve learning how money works, being aware of unethical financial practices, managing financial challenges, and setting financial goals to achieve.
Making informed financial decisions is critical to avoiding unnecessary levels of debt, helping families through complex decisions, and having an adequate income in retirement.
Quick Tips to Become Financially Literate
Here are a few quick tips to follow to improve financial literacy:
- Know Yourself
To change and improve your financial situation, you must have a strong sense of what your financial situation actually looks like. This is where you must first familiarize yourself with your spending habits. List down how much you spend on transportation, rent, utilities, eating out, and more.
Besides that, you must know your credit score, so you’re aware of what financial options you have and where you can improve your financial patterns.
Obviously, one of the most important things that will help with your financial literacy is to set a budget and stick to it. Your budget is an estimated amount of income and expenses for a specific duration, usually a month.
Here are extra tips for budgeting:
- Identify your fixed and variable expenses
- Track your spending for three months
- Determine your income
- Set a budget, either for the day, week, or month
Set aside a portion of your income for your savings, even if it’s just a small portion. How much you’ll save would depend on your goals, though it’s best to start with 20% of your income. If that is not possible yet, just put something away and aim for 20% whenever possible.
Besides that, you must also establish your credit score, which you can do by getting a credit card and paying it back responsibly.
Wrapping It Up
Start following these tips and learn more about becoming financially literate now.